On Friday, the Biden government announced that it had met the requirements of one of the executive ordinances issued on the first day of his presidency: the determination of what is known as the "social cost of carbon". This number attempts to capture the cumulative economic value achieved by investing in limiting carbon emissions. Therefore, the social costs of carbon play a key role in informing the cost-benefit analysis of any government policy or regulation that affects carbon emissions.
Government needs to value the social cost of carbon, which typically requires extensive economic and climate research to be considered. But the Trump administration ended the process of updating the value after choosing an artificially low value. Given 30 days to create a new one, the Biden administration decided to adjust the latest pre-Trump inflation figure and use that until a more detailed analysis of changes in the research landscape over the past year is possible four Years.
The net result is a dramatically higher price for carbon that will allow for far more aggressive regulatory action for at least the next four years.
The social cost of carbon is difficult to calculate. According to the document listing the new figures, the social cost of carbon "should encompass the value of all the effects of climate change, including (but not limited to) changes in net agricultural productivity, impacts on human health and property damage from increased natural Flood risk Disasters, disruption of energy systems, conflict risk, environmental migration and the value of ecosystem services. "Understanding all of these factors requires extensive studies of climate change, human health, ecosystem response, agriculture and economics, among other things.
The US government only looked at calculating the social cost of carbon because it was necessary. In 2008, a court blocked the adoption of fuel consumption rules because they did not attach value to reducing CO2 emissions. (The new document cites the court as a decision: "While the record shows that there are a number of values, the value of reducing CO2 emissions is certainly not zero.") Since that decision, the government has developed and developed this price several times updated. The most recent was at the end of the Obama administration in 2016.
Two things happened in 2017 that changed the landscape. The first is that the U.S. National Academies of Science issued an opinion outlining a process the government could use to ensure that its social carbon costs were kept up to date in line with the development of research. The second is that the Trump administration disbanded the group tasked with keeping the value up to date and agreed on new, extremely low social carbon costs.
The government has done this in part by limiting the cost to just taking into account the impact within the US as opposed to the entire planet – although the rest of this planet trades with us, receives foreign aid, sends us refugees, and so on.
Costs with a discount
The people who put together the new document clearly want to and plan to follow the advice in the National Academies Report. However, it is also clear that there is no option within the 30-day period of the Biden Executive Order. And the administration chose 30 days because so many of the regulations they are looking to revise – some already discarded by courts while others are the subject of legal proceedings – need a value for the social cost of carbon.
So the new document reverts to the last reasonable value derived in 2016, updates it for inflation and uses that. The estimates include the social costs not only for carbon dioxide emissions, but also for two other greenhouse gases: methane and nitrous oxide.
To understand the values, one needs to understand what is known as the discount rate. This rate is meant to take into account the fact that the cost of something in the present is in the form of a currency value that will be worth less in the future. Also, people tend to value money they have in the present more than money they have saved in the future. While it is clear that a lower discount rate means that the current cost of issuance is higher, there is considerable controversy over how accurate the discount rate should be. This London School of Economics document explains everything in greater detail and shows that five years ago the average economist believed that a discount rate of about 2 percent was climate appropriate.
The new document calculates the social cost of carbon using three different discount rates of 5 percent, 3 percent, and 2.5 percent – all higher (and therefore cheaper) than the 2 percent rate proposed by the economist survey. But even the 5 percent figure has a social carbon cost of $ 14 per tonne of emissions, roughly three times what the Trump administration used. At the high end, the 2.5 percent figure comes in at $ 76, or more than ten times the Trump administration's.
Real World Impact
To get a feel for what this means, we can burn enough coal to produce a megawatt-hour of electricity that the energy information agency says will produce roughly a ton of carbon emissions. For domestic energy consumers, the typical price for this electricity would be around $ 128.00. Given a 3 percent discount in the middle of the road, the social cost of carbon from these emissions would add $ 51.00 to that price, an increase of 40 percent.
Even given this modest value, the social cost of carbon means that the most sensible steps to take to limit coal use will pass whatever economic tests you can throw at them. In particular, this does not include all health care costs from the other emissions associated with burning coal and is therefore an underestimate of the overall societal burden. The use of coal simply exports far too many future costs to society. Its current use is only economical as we pretend that cost doesn't exist.
The costs also increase over time, calculated at 5-year intervals. This is because more emissions are being tied up in the meantime, which means that every additional tonne of emissions in the future will further remove us from a desirable climate. At the 3 percent discount rate, the social cost of carbon will be $ 85.00 by 2050.
Methane and nitrous oxide are far more powerful greenhouse gases, and their current social costs are astronomical in comparison. With the same discount rate of 3 percent, one tonne of methane emissions causes social costs of USD 1,500.00. Nitrous oxide reaches $ 18,000.00.
This, in turn, means that almost any regulation to limit methane leaks – like the one issued by Obama and then repealed by Trump – would easily pass an economic test. It could also have a strong impact on the Biden government's plan to reassess the price of gas drilling in states, which is expected to include the environmental cost of the fuel being extracted.
None of this means that society is suddenly starting to pay the social cost of fossil fuels in their electricity bills, as emissions regulations do just that: limit emissions. Instead, regulations generally leave the private sector to find economical ways to ensure these limits are met. In many cases, however, the regulations themselves have to be justified through a cost-benefit analysis, and these are often the subject of legal action. These values for the social cost of carbon are not only more realistic, but will likely make it harder to question Biden's upcoming regulatory action for economic reasons.